Self-serving causal disclosures and short-term IPO valuation – evidence from China

Abstract

We examine the association of self-serving causal disclosures regarding earnings-related outcomes in the prospectuses of Chinese IPO firms and short-term IPO valuation (offer price-based valuation and IPO first-day underpricing). Using detailed content analysis of causal explanations in the management commentary section of the IPO prospectus, we find that assertive causal disclosures regarding positive outcomes, such as enhancements and entitlements, are associated with higher IPO offer price valuation and subsequent lower first-day underpricing. Defensive causal disclosures regarding negative outcomes, such as excuses, justifications and causality denials, however, tend to negatively affect IPO offer price valuation but are not associated with first-day underpricing. This study provides empirical evidence of the close alignment between self-serving causal performance disclosures and short-term valuation in a proactive environment such as the IPO setting. Moreover, it underscores the differential impact of assertive and defensive causal performance disclosures in a context where management's reputation is not yet well established and disclosure credibility is hard to assess.